Finally, the regulation encourages international cooperation among “like-minded” countries, through the sharing of experience, best practices, and information on foreign direct investment (a trend already visible among certain OECD governments).
2.2 Specific implications for Chinese investors
While the EU will remain on the liberal end of the spectrum, the new FDI screening framework will generally increase scrutiny of foreign acquisitions – and could affect Chinese investors in particular. While non-discrimination toward the nationality of an investor is a core principle of the EU and of the new regulation, some of its provisions overlap with core characteristics of Chinese investment in Europe to date.
First, many of the areas and sectors earmarked for special scrutiny under the new EU rules are preferred sectors for Chinese investors in Europe. China’s FDI profile in the EU-28 is very diverse, but a large share of investments is targeted at European technology and innovation assets. Chinese investors also spent more than EUR 29 billion on EU infrastructure and logistics between 2012 and 2017.
Second, the new rules call for heightened scrutiny of investments by directly or indirectly state-controlled entities (including through significant state-backed funding, rather than ownership). Based on historical patterns, about 60 percent of Chinese FDI in the EU since 2000 originated from state-owned or sovereign entities in China.
Finally, the regulation encourages member states to review investments that form part of “stateled outward projects or programs.” Given the pervasiveness of industrial policy in China and the dominance of state-owned banks in the country’s financial system, this vague formulation could open the door for member states to review a large swath of Chinese investment in the EU.
To illustrate the potential impact of the regulation on Chinese FDI into the EU-28, we built a sample of major Chinese acquisitions in the EU in 2018 (greenfield investments are not covered by the new regulation) and reviewed whether they match the three dimensions mentioned above.4 First, we determined whether the acquisition target is operating in one of the potentially sensitive sectors mentioned in the regulation (“sensitive sectors”). Second, we reviewed the ownership of acquirers and identified investors that are at least 20 percent owned by Chinese government entities (“state ownership”). Third, we identified transactions in industries mentioned in or linked to China’s “Made in China 2025” plan (“policy-backed”).5
While only a rough approximation, this exercise illustrates that the guidance in the new EU investment screening framework theoretically covers a very high share of inbound Chinese M&A transactions. We find that 83 percent of the number of transactions in our 2018 sample meet at least one of those criteria (Figure 7): 46 percent of transactions fall in one of the sectors marked as sensitive (accounting for 71 percent of total sample value); 25 percent of the transactions were done by state-owned entities (representing 41 percent of total sample value); and 58 percent (in both number and value terms) fall into a sector linked to the “Made in China 2025” program. More than one third of transactions in our sample (60 percent of the sample value) meet at least two of these criteria, and one in ten (and 18 percent of the sample value) meet all three. Importantly, these figures would likely have been even higher in previous years since the role of SOEs was more pronounced and Information and Communication Technology (ICT) and infrastructure played an even greater role in the industry mix.
Of course, not all these transactions would necessarily be reviewed. The implementation of the EU framework will depend on the EU’s 27 national governments (assuming the UK will leave the EU) all of whom will retain significant leeway to interpret these regulations strictly or liberally, and to define the sectors they consider as sensitive. Moreover, investment reviews do not necessarily mean negative outcomes, and EU governments will retain the right to authorize transactions even if they fall into one, two, or all of the categories, if no risk to national security or public order is found.
However, it is likely that national governments will consider EU guidance when they monitor and review investments under existing regimes, especially since the European Commission and other member states can request information on transactions in these areas. It is also likely that the EU framework will influence countries that are in the process of setting up new regimes or updating existing ones.